To know if you are asset and/or cash rich, it is vital to understand a unique money trait called “liquidity” – whether your asset could be quickly converted to cash. Assets that can be easily converted to cash form Movables and the rest form immovable assets.
Most of the cash assets such as bank FD, RD & Post office schemes and capital market instruments such as open-ended mutual funds & stocks are liquid and form part of movable assets. There are 2 stages in one’s life when most people desire to have a higher percentage of the movable assets in their portfolio. They are buying a dream home & children’s Education/Marriage expenses.
Lets take Robin who is building his dream home. Due to an unexpected rise in the cost of certain raw materials, say his budget overshoots by 20%. He now needs extra cash to meet this shortfall. Even if he has other properties, they may not be readily convertible to cash to finish constructing his dream home.
This is where capital market instruments scores over physical assets. They could be sold anytime as there is always a buyer to bid your sale. And cash proceeds from the transaction gets deposited in your bank account in 2days.
Lets consider Priya, a salaried mother, who invests Rs.12000 p.m in equity funds for 5 years from 2013 towards her daughter’s college education. At the end of 5 years, in 2018, her investment grows to Rs.10Lacs (15% p.a return) & meets the education expense. At the same time, Anu, Priya’s friend, invests Rs.5L in a plot of land. As most of the real estate growth had stopped in 2013, her plot did not appreciate much and she is also unable to find a buyer for her plot when she needs it in 2018.
This is a critical time for Anu as she wishes to have a movable asset to support her daughter’s education, but she’s left with no choice except to go for a loan. So, it is important to align major financial liabilities in one’s life with movable assets or at least convert some of the immovable assets to movables, 1-2 years before the actual liabilities arise.
Immovables are just that – they cannot be quickly converted to cash & they include a variety of assets such as property, land, agricultural properties, art, a business (shop, school, franchisee or showroom) etc. These assets could be tended to only during one’s active life stages. Once a person retires, age-related ailments or living abroad with children makes the management of immovable assets a big burden to shoulder. It gets difficult to run around the various government agencies & keep up with the ever changing procedures & digitization efforts.
Take the case of Sundar Sir, a retired banker, whose son is settled abroad. He owns 1 tenanted property and he manages another tenanted property for his son. Every two years, the tenants change, so he needs to work with contractors to ready up the place & with the broker to fix up a tenant. In case he is traveling abroad or on a pilgrimage, it gets difficult for him to manage the properties.
And most seniors are taken for a ride when they decide to sell their properties, right from having to produce non-existent documents to a beaten down sale price, not to mention the challenges in handling the black money one is forced to accept in these transactions.
In other cases, when both parents passes away, the transfer and sale procedures get very complex in case all children have settled abroad. Not only it is time consuming for them, but the lack of correct guidance on legal practices, tax compliance and repatriation of funds poses a much bigger challenge for them to dispose of the immovable assets.
When to move to movables?
During your income earning years, it is key to plan a portion of your movable investments to align with your personal financial goals & liabilities. This way, you will never have to face cash crunch and be “Asset Rich, Cash Poor”.
And during retirement, it would be a good idea to consider liquidating your excess immovable assets at the earliest. When children settle abroad, they have their own properties to manage overseas. They are no longer interested in managing your plots of land in an undeveloped suburb. So, when it comes to bequeathing your excess assets, leave it to them in liquid form, which is hassle-free for both the giver & the receiver.